Purchasing managers in high spirits

(02.02.2011) Purchasing managers around the world contributed to a bright mood in markets yesterday, and investor regained their appetite for risk. The euro was yesterday's winner, but also GBP, SEK and NOK strengthened against the dollar.

By Kjersti Haugland, Analyst at DNB Markets

illustration: tableInvestors put aside their worries of increasing inflation and a volatile situation in Egypt, and were instead encouraged by positive growth signals in several countries. Yesterday night China's manufacturing purchasing managers reported that production growth is holding up despite monetary tightening. European, British, American and Scandinavian managers followed up during the day with surprisingly strong reports. Hence, stock markets and long government bond yields rose.

The euro was the winner yesterday, strengthening by almost one per cent against the dollar compared to yesterday morning. The debt unrest has subsided for now, and European manufacturers still display no signs of slowdown caused by the austerity measures in Europe. Euro area manufacturing PMI in January was surprisingly revised upwards from 56.9 to 57.3. The German sub index remains far above the others, at 60.5. More surprisingly: the Italian and the Spanish indices have risen.

There is also a glimmer of light on the labour market. Unemployment fell markedly for the second consecutive month in the euro area, by 73 000 persons in December. This took the number of unemployed down to the lowest level since April 2010. The situation is still gloomy: there are 16 million unemployed persons in the euro zone, amounting to 10% of the labour force. The total numbers show a great divide between the member countries. Germany at the bottom with an unemployment rate at 6.6%, Spain on the top at 20.2%. Yesterday's January figures for German unemployment shows that the rate keeps falling. It is now at its lowest level since 1992.

The British manufacturing sector has also shown a very strong development lately. Pound sterling strengthened further against the dollar yesterday, after news that the CIPS-index continued to new heights in January. The rise from 58.7 to 62.0 was stronger than expected, and particularly strong for production and orders. The employment index rose to 58.8, the highest level since the start of the survey in 1992. Production in manufacturing points to a very strong start of 2011, but unfortunately: the service sector – a much more important part of UK's economy – is struggling.

The US ISM index increased from 58.5 to 60.8, also more than expected. The rise was particularly strong within orders and employment. The latter came up to its highest level since April 1973, which could be a promising sign for ADP employment released later today. The outcome of ADP, which measures private employment only, is frequently taken as an indicator of the important payrolls numbers released two days later. It has, however, often proven to be a poor one.

The Norwegian and Swedish manufacturing PMIs were also stronger than expected in January. This led to a sudden drop in the EURSEK, which came down to 8.78. It has come back up afterwards, and is now back at the level from yesterday morning.

In Norway, the much discussed house prices gained more attention in markets, growing by 0.9% m/m in January, down from 1.0% in December. This was somewhat more than we expected, but is still a sign that house price growth is dampening. The monthly rise has declined continuously from the September top at 1.6%. Growth is still strong though and the implied risk of future imbalances remain. Still: if growth keeps slowing down, the need for Norges Bank to react by hastening hikes is reduced.

NOK strengthened on a broad basis yesterday, which may be partly a result of the news from the housing market, but mainly a result of oil prices staying above 100 USD per barrel.